Bank of Ireland's £600 million acquisition of the Bristol & West building society is a bold move. The biggest purchase in the bank's history - and the third largest acquisition ever made by an Irish company - it is intended to lower the bank's reliance on earnings in the domestic market. Investors responded positively to the news, pushing the share price up 14p to 440p, on the basis of forecasts that the move would yield a positive return to shareholders. The acquisition forms part of a clear strategy being pursued by Bank of Ireland management. The bank intends to offer a full range of services in the domestic market. But in operations outside Ireland it will aim to have a meaningful presence in strategic geographic or business markets, rather than trying to provide a full general service. It is reducing its presence in the US and increasing its exposure to Britain. The bank's management will hope that the acquisition makes it big enough to thrive in the competitive market for savings and mortgage lending in the South of England.
Scale is vital in modern banking operations. In the US, the bank has settled for a limited operation, merging its First NH subsidiary in New Hampshire with the Royal Bank of Scotland's. Bank of Ireland's acquisition of First New Hampshire in the US in 1988 did not turn out well for the bank, due to the subsequent collapse of the New England economy. Bank of Ireland will hold 23.5 per cent of the merged US operation. Limited returns from the US and its small size in the British market has left the bank relying heavily on the Irish market, which is now contributing 77 per cent of profits. This is all very well when the economy is growing as strongly as it has been over the past couple of years. However, taking a longer term view, the bank clearly wants to build up its profitability in the British market.
Bank of Ireland knows the British mortgage market well, having operated in it since 1987. But because its British mortgage operation has had no access to retail deposits, it has had to buy funds on the more expensive wholesale money market to lend on to mortgage customers. This was a strategic weakness in the operation which will be corrected with the acquisition of Bristol and West. Bank of Ireland does not appear to have paid over the odds. The acquisition should start adding to the bank's profitability when it is completed next year. The bank will hope that by merging its existing operations in Britain with Bristol & West it can become a strong presence in the South of England market. Cost savings in the Bristol & West operation should also increase profits.
Any improvement in the British economy and particularly in the difficult housing market should benefit the bank's operations. The British housing market has gone through a difficult period and prices have been slow to recover, with many homeowners still having mortgages in excess of the value of their properties. Recent surveys have suggested that prices may finally be starting to lift, although it is too early to predict a sustained pick up. The bottom line for Bank of Ireland will be the return the latest investment offers to shareholders. It is now up to the Bank of Ireland's management to generate such a return. For the economy, meanwhile, a strong banking sector is important and healthy overseas operations can contribute to this.